Category: State aid

Rightly, no-one ever believed section 1(1) of the Localism Act 2011: “A local authority has power to do anything that individuals generally may do”. Section 2 (“boundaries of the general power”) put paid to that.
There are many good things which authorities might do, if they were allowed. In some circumstances, this would be to dispose of their interests in land at an undervalue, where this would unlock viable development, or would for example secure more affordable housing.
In an excellent recent Property Law Journal article Stephen Ashworth sets out the pitfalls of section 123 of the Local Government Act 1972, which prevents local authorities from disposing of land “for a consideration less than the best that can reasonably be obtained”. “Consideration” means financial consideration rather than any wider benefits that may be secured. There is an exemption from consent in cases where the undervalue is £2m or less and the purpose of the disposal would contribute to the promotion or improvement of economic, social or environmental well-being. Stephen rightly questions this:
“Critically the £2m limit is risible in the present market. It is the value of less than five London starter homes. It is often less than the difference between competing bids for land. At the very least it needs updating. In a devolutionary world, maybe, if a limit is necessary, it should be set locally, perhaps by mayors or local enterprise partnerships.”

It is certainly disappointing that the £2m cap hasn’t been increased, or that the Secretary of State has not set out any guidelines that encourage deals at an undervalue above the threshold which promote well-being, particularly in the form of increased delivery of housing, especially affordable housing.

By coincidence, since the article was written, on 26 August 2016 Holgate J delivered judgment in R (Faraday Development Ltd.) v. West Berkshire Council & Anor where he rejected a claim by a competing developer that West Berkshire’s development agreement with St Modwen in relation to the comprehensive regeneration of the London Road Industrial Estate in Newbury was in breach of section 123. Landmark Chambers’ summary sets out the judge’s distillation of the principles to be applied in determining when a court should intervene in relation to the application of section 123. After a detailed examination of the deal that had been negotiated he rejected the section 123 challenge. It was common ground between the parties that if that ground of challenge failed, so too would the allegation fail that the deal amounted to unlawful state aid (ie a distortion of competition by favouring any party by virtue of the support provided by the Council to that party).

The case is also interesting and useful for its detailed examination as to whether the arrangement between St Modwen and the Council was caught by public procurement requirements as a public works contract, in which case the Council would have breached its obligation to follow the formal public notification and competitive procedures laid down in the Public Contracts Regulations. After an analysis of the European case-law, the judge rejected this ground too:“In my judgment the DA is a contract to facilitate regeneration by the carrying out of works of redevelopment and to maximise WBDC’s financial receipts, particularly rent, from the LRIE. The provision of services under clauses 4 to 7 and land assembly do not represent a main purpose in themselves, but simply facilitate the Council’s regeneration and financial objectives, the “twin objectives” with which WBDC’s process began (see paragraph 29 above). WBDC lawfully decided that the DA itself should not impose upon the developer an enforceable obligation to carry out the redevelopment. It is therefore not a “public works contract.”

The case should give comfort to developers and authorities alike that the pitfalls of section 123 along with equivalent risks arising from EU state aid and public procurement legislation can be safely navigated. However, challenges on these grounds remain an ever-present threat, whether for instance the state aid complaint that has been brought in relation to the London Borough of Hammersmith and Fulham’s arrangement with CapCo in relation to the Earls Court development and the successful challenge (Stephen Ashworth acting for the claimant…) of Winchester City Council’s revised development agreement with Thornfield for the now possibly defunct Silver Hill project in R (on the application of Gottlieb) v Winchester City Council (Lang J, 11 February 2015).

The need for some common-sense over section 123 is illustrated by the interesting wrinkle in London in relation to section 123: it doesn’t apply to Transport for London, because it is not a “principal council” for the purposes of the section, even though Schedule 11 paragraph 29 of the Greater London Authority Act 1999 does require that when it engages in development, either directly or through a subsidiary, it must do so “as if it were a company engaged in a commercial enterprise”. So it can dispose of land at an undervalue (subject to avoiding state aid problems) but can’t take an equivalently enlightened position when developing in its own right or through a subsidiary! These complications will no doubt constrain how the London Mayor delivers on his promise of increased levels of affordable housing on Transport for London land, the subject of a 26 August 2016 EGi piece.

It would of course be equally useful to see a lighter touch state aid and public procurement regime, but that relies on rather larger political cogs.
A final note arising from Faraday:
Interesting to see that the case featured Landmark’s Batman and Robin, David Elvin QC and Charlie Banner, this time on opposing sides, with Robin being given a very hard time by Holgate J, if the judgment is anything to go by…